Despite disappointing job growth last month, the unemployment rate fell to its lowest level since early 2008, sharpening the debate within the Federal Reserve over whether to raise interest rates when policymakers meet in two weeks.
A report Friday from the Labor Department — which estimated that employers added a less-than-expected 173,000 jobs in August even as the official jobless rate dipped to 5.1 percent — provided evidence for both camps to make their cases.
The slowdown in job growth and the absence of any significant wage pressure could strengthen the arguments of those who see little risk in keeping an accommodating monetary policy and waiting not just for more positive data but for unruly markets to settle down.
On the other side, there were enough positive indicators to keep a September tightening in play, even as Wall Street turns more attention to the possibility of a Fed move in October or at the central bank’s last meeting of the year, in December.
“The latest jobs data will leave everyone maintaining their position on the Fed,” said Steven Ricchiuto, chief economist at Mizuho Securities USA. “Not the decisive data the Street wanted.”
The report was hotly anticipated, mainly because it represents the last major piece of data the central bank will have on hand before its meeting Sept. 16-17.
The August payroll increase was well below the 220,000 jump that economists had expected, but the unemployment rate’s fall to 5.1 percent from 5.3 percent in July bolstered the case that the job market was returning to its pre-recession health.
At that level, joblessness is nearing the level that economists and the Fed consider close to full employment. Inflation foes worry that allowing the unemployment rate to fall significantly below 5 percent runs the risk of leading to an overheated economy.
While millions of Americans are still struggling to find work that pays adequately, there are nascent signs that wages are finally beginning to rise.
Average hourly earnings rose by a better-than-expected 0.3 percentage points in August. Payroll gains for June and July were revised upward by 44,000.
Most Federal Reserve officials have signaled that they think this year is the appropriate time to raise interest rates from near zero, where they have been since the depths of the financial crisis in late 2008.
But the exact timing of the decision has become an obsession for traders on Wall Street, who have enjoyed a long period of ultra-cheap money that helped, until the last few weeks, to feed a long bull market.
Whenever the Fed decides to act, the initial rate increase will be small — a quarter of a percentage point — but it looms large psychologically for the markets because it will be the first increase in short-term rates by the Fed since June 2006.
All this has contributed to a knife-edge quandary for Federal Reserve policymakers: Raise rates too soon and markets could plunge, economic momentum could fade and long-sought hopes for better-paying jobs could wither. Wait too long, however, and the Fed risks rekindling inflation and fostering speculative excesses on Wall Street.
The sharp selloff in global markets recently has only complicated matters.
“A month ago, this report and the other data on the economy would have created a strong rationale for raising rates at the September meeting,” said Nariman Behravesh, chief economist at IHS, a research and consulting firm that tracks the economy. “But the world has changed and our expectation is now for a rate increase in December.”
A minority of officials made up their minds even before the release of the August numbers. Jeffrey Lacker, president of the Federal Reserve Bank of Richmond, delivered a speech Friday titled “The Case Against Further Delay.” Lacker, a voting member of the policy committee this year, has indicated he is likely to dissent if the Fed does not raise rates at the September meeting.
On the other side of the debate, Narayana Kocherlakota, president of the Federal Reserve Bank of Minneapolis, argued in a speech Thursday night that the Fed should not raise rates this year because price inflation remains too low.
The longer-term trend for job creation in 2015 has been fairly robust, even if wage gains have been disappointing. Since the start of the year, the average monthly payroll gain stands at 212,000.
Because of largely seasonal rather than fundamental factors, however, employment reports for August have a long history of coming in below expectations, only to be revised upward later by the Labor Department.
Over the last five years, according to Goldman Sachs, the government reported an average gain of 30,000 fewer jobs for the month than economists had expected. These August figures were ultimately revised upward by an average of 79,000.
Because of these shaky statistics, many economists say the bar is lower this time around, at least in terms of what constitutes a healthy labor market in the eyes of the Federal Reserve.
In other months, a gain of less than 200,000 jobs might be considered lackluster at best, weak at worst, said Robin Anderson, senior economist with Principal Global Investors in Des Moines.
But given August’s history of big upward revisions, Fed officials and investors could take a more forgiving view of the data this report.
“The trend is so strong that one number alone won’t derail the Fed,” Anderson added. “These numbers are prone to revision, and you have to take the first estimate with a grain of salt.”